March 3, 2018
In Part 1 we discussed the concept and benefits of central bank-issued cryptocurrencies (CBBCs). Today we will go into more detail on the practical challenges associated with such a global monetary transformation.
- Early Price Boom and Volatility – Say Fedcoin is announced as legal tender effective as of 8:30 am EST on January 1st, 2021. Unless there is some clever, multi-level mechanism in place for the central bank to keep the price stable in the first days of trading you can imagine the incentive for one to be first in line to purchase as many coins as they can possibly get their hands on. This creates the following concerns:
- Immediate hyper-deflation fueled by full-scale demand coupled with hostile levels of speculation
- High price volatility in relation to fiat currencies and other cryptocurrency assets until the system normalises
- Risk of entitling major institutions, corporations and the super-rich to attain an unfair advantage over the rest of society resulting in further consolidation of the 1%
This is a classic prisoner’s dilemma. Such a monetary shift will be impossible without coordinated efforts across all major central banks. The lack of it will severely exacerbate the above risks though this will be the most likely outcome.
- The Distributed Ledger Problem – The backbone of the bitcoin phenomenon is the distributed ledger technology. Guided by its principles, bitcoin and other cryptocurrency transactions: (1) occur on a peer-to-peer basis and (2) are validated by the network of users. Central banks will need to consent for transactions to clear and settle on a peer-to-peer basis without a trusted third party.
- A “Fedcoin” monetary system will rely heavily on the Fed, all central banks that have adopted CBBCs and any private market participants that have released digital currencies to act in conjunction as third-party clearers and settling agents. This causes concerns around a future CBBC-based monetary system becoming more centralised than what we have today, which defeats the original intention of blockchain.
- This will eliminate the need for a traditional banking system where over 6,000 banks in the US alone will no longer be needed to facilitate commerce.
The extensive branch network of retail banking is already proving obsolete due to the advancements in the fintech space and the practicalities of online banking.
- The Job Loss Aspect – These pressures coupled with increased levels of automation across all aspects of traditional banks’ business models impose large and controversial implications on the sector and the economy as a whole (see our article on Universal Income). The industry will undergo rapid concentration not just in the sheer size and number of banks but also in terms of the functions the institution carries out for society. Further to this:
- Regulators will face the challenge of establishing a framework to gather, analyse and monitor the billions of transactions flowing through the blockchain on a daily basis.
- This will need to be done in sync with an increasing number of market participants that not only employ the blockchain but expand and build upon the distributed ledger technology to facilitate not only faster and cheaper payments but explore all untapped use cases.
- Licensing bodies will need to be established to maintain the integrity of the economy. Similar to the way the European Union is shaped – any blockchain that will want to join the ‘single market’ will need to comply with thorough standards.
- The Political Implications – The Congress, the IMF and the World Bank, etc. will almost certainly want to weigh in on such a vast restructuring of the global monetary system and the world economy.
- Unlike the spark of innovation, unified political agreements tackling complex global issues often take decades and typically result in half-baked, lowest-common-denominator solutions due to the trade-off of losing economic output today vs. prosperity tomorrow (e.g. climate change debate, nuclear disarmament, etc.).
The ‘Financialisation’ of the Digital Generation
Our strong view is that central banks will sooner or later embed blockchain technology into their national economies. Due to political, institutional and conceptual challenges Fedcoin is unlikely to be seen in the near future. However, what we already know is that the Fed, among other central banks, is actively researching the distributed ledger technology. The Senate hearings on cryptocurrencies that took place last month are an optimistic testimony that blockchain and its derivations are largely encouraged by one of the world’s leading authorities.
In the meantime, global issues such as advances in automation will continue to cause unemployment across the West that will characterise the next two decades. The too-big-to-fail, personnel-heavy institutions,that we’ve become so comfortable with will need to restructure and cut staff…by a lot. Rising unemployment levels will lead to sharp decreases in government budgets due to the reduction in revenue from income tax and decreased consumption.
All of these will push governments to finally start paying attention and seek solutions in universal basic income, taxation of robots, etc. The distributed ledger technology is coming at the right time. Its wider adoption will inadvertently revitalise countless heated debates that have been ignored for decades and require controversial measures in a timely manner for society to prosper.
This article is not attempting to overpromise blockchain as the solution to world hunger, as the cliché goes. It is to highlight that governments and society as a whole will inevitably have to make tough decisions and take coordinated actions to better our futures; the sooner the authorities realise that blockchain is the enabler for these structural shifts to take place the better.
— End Part 2 —